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by: Anthony Parent 2019-01-30
The Tax Cuts and Jobs Act (TCJA) is a major piece of legislation voted into law as a tax reform in 2017. The changes introduced by the TCJA affect many aspects of how individuals and businesses report on, file, and pay federal income taxes from 2018 and onward. In this guide, we’ll explore the specific changes that businesses need to make so stay compliant with federal legislation and IRS guidelines.
We’ve reviewed and researched the various guidance notes and publications issued by the IRS to create a list of the basics for business owners and employers when it comes to the The Tax Cuts and Jobs Act.
If you’re a business owner, administrator, accountant, bookkeeper, or tax filer, you’ll find some helpful advice on the major changes introduced by the TCJA. We’ll also make suggestions on what you can do now and in future to meet the requirements set out by this tax reform.
The TCJA was voted into law in 2017. It affects any federal taxes incurred, filed, or due in 2018 and beyond:
These changes will impact your business earnings, tax due, estimated taxes, and various other aspects of your taxes for 2018 and onwards.
You need to make changes now to ensure you remain complaint, don’t incur penalties, or drastically underpay or overpay tax owed.
For many business owners, one of the main benefits of the TCJA is a 20% reduction on Qualified Business Income (QBI), which we will discuss below. However, the TCJA also made a number of other changes which will impact the amount of tax you or your business need to pay. These changes include:
Changing tax rates and tax brackets.
Revising business expense deductions.
Increasing the standard deduction.
Removing the personal exemption.
Increasing the child tax credit.
Making changes to other tax credits and fringe benefits.
Limiting deductions for state, local, and property taxes.
Discontinuing some other deductions.
In addition to how this changes how much is due for corporation taxes, it also affects the tax you owe on “pass through” income as a sole proprietor, partnership, LLC, or S corporation:
Speak to your tax firm about how these changes affect the final amount of tax you need to pay.
Factor this into the estimated taxes you pay through the year.
If your business earnings or other portions of your income are not subject to standard tax calculation and withholding (as they would be through a W-2 / payslip), you will need to pay estimated taxes throughout the year. These estimated taxes can include:
Federal and self-employment tax due to the IRS.
State and sales tax due to state and local government.
The changes introduced by the TCJA will affect how much you need to pay in estimated taxes:
Speak to your tax firm about how this will impact your tax liability.
Use the resources shared at the end of this guide to help calculate what you’ll owe in estimated tax.
Understand how these changes may impact what you owe through other types of taxes like self-employment or state tax.
One of the main benefits of the tax reform in 2017 and 2018 was to reduce the corporate income tax rate from 35 percent to 21 percent. The TCJA also extended similar reductions to “pass through” entities like LLCs and S Corporations. The main benefit is that businesses can “discount” their Qualified Business Income (QBI) by 20% to calculate how much federal income tax is due:
Understand how the tax reform to QBI will reduce the amount of tax you owe.
It’s important to note that the QBI applies only to your business income calculations for the purposes of how much federal income tax you owe. It does not typically affect:
Self-employment or payroll tax.
State income tax.
Sales and use taxes.
How this affects you:
Continue to calculate and pay these taxes based on the latest guidance from the IRS and your state or local government.
If you own or take profits from a pass through entity and pay income tax, the reduction on your QBI should reduce the amount of income tax you pay. There are some restrictions on how QBI is applied.
Your business must be:
A domestic US business.
Operated as a sole proprietorship or through a partnership, S corporation, trust, or estate, including LLCs.
For taxpayers with federal taxable income that exceeds $315,000 (married, filing jointly) or $157,500 for other taxpayers, limitations apply, including:
The type of trade or business (for example, health, law, and professional service businesses may be excluded).
The amount of taxable income.
The amount of W-2 wages paid by the business.
The unadjusted basis immediately after acquisition (UBIA) of qualified property held.
Other important notes about QBI:
QBI is calculated as the total, net amount of income, gain, deduction, and loss from any qualified business.
The deduction is available for tax years beginning after December 31, 2017.
Most taxpayers can claim the deduction when they file their 2018 federal income tax return in 2019.
The QBI deduction is available against both itemized deductions (Schedule A) or a standard deduction.
Income earned through a C corporation or through providing services as an employee is not eligible for the deduction.
How this affects you:
Check that your business is qualified to use the QBI deduction.
Calculate your total earnings to see if there’s a limit to what you can deduct.
Read through our guide to QBI for more information.
The actual value of the QBI deduction for federal tax purposes is calculated as follows. It is the lesser of:
20 percent of the taxpayer’s QBI, plus 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income.
20 percent of the taxpayer’s taxable income minus net capital gains.
Once the deduction is applied, federal income taxes due are calculated based on the reduced amount of taxable income.
We’ve discussed the standards for the QBI deduction. Now we’ll discuss some of the other changes to deductions, calculating, and reporting income and taxes below.
Excess business losses are limited when it comes to applying them to QBI. If your business generates a tax loss, you can’t deduct an excess business loss in the current year. Instead, it would be carried over to the following tax year when it is deducted as a Net Operating Loss (NOL).
An excess business loss is calculated as follows:
Take all of your aggregate business incomes and gains for the year.
Add $250,000 ($500,000 if you’re a married taxpayer filing jointly).
Deduct your aggregate business losses for the year.
The remaining amount is your excess business loss:
Talk to your accountant if you believe you will have an excess business loss for the year about the best way to show and report it.
Most taxpayers will not be able to carry their net operating losses backwards. Instead, NOLs occurring after 2017 can only be carried forwards:
Establish what your NOLs are likely to be and talk to your accountant about carrying them forwards.
The TCJA made several changes to how meals and business entertainment can be deducted:
Typically, deductions for expenses related to entertainment, amusement, or recreational activities are no longer allowed.
Taxpayers can continue to deduct half the cost of business meals if the taxpayer or one of their employees is present and the food or beverages are not considered “lavish or extravagant.”
Food and beverages that are purchased for entertainment events will not be considered entertainment if purchased separately from the entertainment, or if the cost is stated separately.
Typically, you cannot deduct fines and penalties for violation of the law.
Typically, you cannot deduct payments made in sexual harassment or sexual abuse cases.
If you make business-related payments to charities or government entities and you get state or local tax credits, you can typically deduct those payments as business expenses.
You typically cannot deduct expenses for providing transportation fringe benefits, or expenses associated with providing transportation for commuting, unless this is necessary for employee safety.
The TCJA does make some changes to other deductions including:
Bicycle commuting reimbursements.
The TCJA also makes changes to how businesses depreciate property and claim expenses:
Businesses can expense more under the TCJA, effective immediately.
Certain business assets can be expensed as 100 percent in the first year as a bonus depreciation.
Luxury cars and personal use property have different depreciation limitations.
Some farm property is treated differently for depreciation purposes.
Farming businesses may be able to use an alternative depreciation system.
Find more information on how depreciation is changing in FS-2018-9, linked below.
The TCJA introduces and revises some tax credits for businesses:
New employer credit for paid family and medical leave — credits a percentage of the amount of wages paid to an employee while on family and medical leave for up to 12 weeks per year.
Rehabilitation tax credit — makes changes to tax credits available for historic buildings and rehabilitating historic structures.
The TCJA allows small business taxpayers with average annual gross receipts of $25 million or less in the prior three-year period to use the cash method of accounting.
The TCJA also introduced “Qualified Opportunity Zones (QOZs).” These zones allow for preferential tax treatment for investors who put money into certain economically distressed areas. The idea of Qualified Opportunity Zones is that they encourage economic development and job creation in distressed communities. Investors do not need to live in QOZs to benefit from them, and they can find a list of QOZs in the link at the bottom of this guide.
Investors can defer tax on any prior gains they have invested in a Qualified Opportunity Fund (QOF) until the earlier of:
The date on which the investment in a QOF is sold or exchanged, or
December 31, 2026.
There are some exclusions and benefits based on how long the QOF is held.
A qualified partnership or corporation can file to become an eligible QOF by filling in and returning Form 8996 with a federal income tax return.
The Highlights of Tax Reform for Businesses — an overview of the major changes to tax reform in 2017 and 2018 introduced by the TCJA.
IRS Tax Withholding Calculator — understand what you might owe in estimated taxes.
Publication 505, Tax Withholding, and Estimated Tax — various guides to paying estimated taxes.
Pay As You Go, So You Won’t Owe — a guide to withholding, estimated taxes, and ways to avoid the estimated tax penalty.
Form 1040ES — a guide to the main tax changes, tax rate schedules, and a worksheet for figuring the right amount to pay.
Qualified Business Income Deduction FAQs — basic answers on the 20 percent deduction for pass-through businesses.
FS-2018-9 — new rules and limitations for depreciation and expensing under the Tax Cuts and Jobs Act.
FAQs on Quality Opportunity Zones and Qualified Opportunity Funds — details of QOZs and QOFs.
Opportunity Zones List — a list of available QOZs and other resources.
What is QBI? — how the IRS Qualified Business Income deduction works.